Counterparties: Should we fear Voldemort?

By Ben Walsh

April 9, 2012

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Yes, a billion dollars is cool. But what about a team led by a mysterious trader nicknamed “Voldemort” making potentially market-distorting bets at the nation’s largest bank by assets? That’s really cool.

In Bruno Iksil, a JPMorgan trader also known as the “white whale,” Paul Volcker – and the regulation that bears his name – finally has the nemesis he deserves.

Bloomberg reported on Iksil last week, noting that he reportedly earned $100 million a year for the bank in recent years, which has rival traders claiming that Iksil’s bets could violate the Volcker Rule. The WSJ also wrote a piece on Iksil. Additional details and an improved pseudonym in a follow-up by Bloomberg vaulted him back into the headlines today:

Iksil’s influence in the market has spurred some counterparts to dub him Voldemort, after the Harry Potter villain. He works in London in the bank’s chief investment office, which has assembled traders from across Wall Street to its staff of 400 who help oversee $350 billion in investments. While the firm describes the unit’s main task as hedging risks and investing excess cash, four hedge-fund managers and dealers say the trades are big enough to move indexes and resemble proprietary bets, or wagers made with the bank’s own money.

Lisa Pollack tries to unpack two crucial pieces of this story, the motivations of the sources and whether indeed Iksil is distorting the CDS market in question. Sober Look argues that the most likely scenario is that JPMorgan is hedging its exposure to its own debt, rather than setting up a proprietary trade, which would be banned under the Volcker Rule.

It’s a bit ironic that it was initially a small group of hedge fund traders who complained to the media about how Iksil’s trades were warping the free market.

But however market-distorting, it does seem likely that the trades are hedges, albeit massive and increasingly public ones. These are probably trades JPMorgan’s rivals in this particular CDS market just don’t like being on the other side of.

If the facts of the trades as now reported are true, we’re left with the same uncertainty regarding the Volcker Rule that we’ve had since it was proposed. How much harm does prop trading by deposit-taking institutions cause to the global financial system? How do you define prop trading? How do you enforce a ban on it? When does a hedge become a systemic risk?

To help think through these questions, we put together the best pieces on the still vague and hotly contested Volcker Rule: